Trash Talk

I recently moved from Philadelphia, where trash and recycling pick-up are included in property taxes, to a smaller town where my taxes cover recycling but not trash pick-up. The waste management companies where I currently live offer several pricing options for garbage collection:

1. Pay-by-weight at the dump: The catch is that there’s a minimum $15 fee, so you need to generate lots of garbage to make this worthwhile.

2. Pay-by-the-can pick up: You pay a nominal charge, usually about $3-$3.50, per 33-gallon trash can. Under this option, your fee fluctuates directly with the amount of garbage you produce.

3. Flat rate: You pay a flat monthly fee of say $10, and this includes only 1 trash can pick-up per week. If you have more than one can, you pay an additional fee, but if you don’t have any trash, you will not receive any credit for future collections. This service makes sense if you reliably generate 1 can per week.

I decided to go with option two: pay-by-the-can pick up. Each Tuesday morning, I put out my 33-gallon trash can (if it’s full), and the lowest cost trash company I could find ($3.00 per can) comes to collect. The window in my home office overlooks the road, so I typically hear any cars and trucks that drive by. To my surprise, I heard five different waste management trucks drive by my house in one day! My immediate reaction was: How can this be efficient? Surely there are economies of scale to trash pick up?

Consider the following simple example. Suppose there are four houses located along Country Road. The road is a one way street, so the only way to drive by any of the houses is to drive east along Country Road, passing by all four houses with any trip. If a trash collection company is hired to pick up trash for House 1, what are the additional costs associated with picking up trash at any of the other three houses?


One could argue that the additional costs are negligible. In other words, the cost of picking up trash at the first house is high because you have to have a trash collection truck, a worker to drive it, a worker or two to collect the trash, fuel, etc. But once you’re out on Country Road, the marginal cost of collecting trash from the surrounding houses is just the wear and tear on the truck’s brakes, a slight wage expense to your workers, and the cost of taking care of the additional waste (such as bringing it to the local dump).

It’s probably true that the average cost curve for a trash collection company is not strictly downward sloping since once a certain number of houses are served, the company would need to obtain additional trucks and workers. I would still argue that there are economies of scale for trash collection companies once they enter a particular neighborhood. It seems silly to me that in a given week I see at least ten different trash collection trucks drive by my street.

Wouldn’t it be more profitable for all companies if they each monopolized a small region? The additional cost of collecting trash from a neighboring house must be smaller than the additional cost of servicing a house in an entirely different neighborhood. Even without changing prices, revenue would probably remain constant while costs would decline, leading to higher profits for each firm.

Discussion Questions

1. What kind of market structure does trash collection represent? If the city decided to step in and control trash collection for my town, what pricing options might it choose?

2. Do consumers benefit at all from having several waste management companies to choose from with different pricing schemes?

3. If the city allowed waste management companies to “monopolize” particular neighborhoods, how might this affect the market? What are the effects of competition on prices, welfare, and pick-up quality (such as timeliness, effectiveness, etc)?

4. Given the number of trash collection companies in my neighborhood, what does this say about the profitability of this industry? If the town does not have strict anti-trust laws, would it be profitable for one firm to buy out all the others? What problems might arise if only one firm controlled trash collection for my entire town?

Defining Markets

One rarely has the opportunity to witness the formation of a monopoly, but that’s what will happen if satellite radio broadcasters XM and Sirius are allowed to complete their proposed merger. But is it really a monopoly? On the surface, this appears to be a classic example of “merger to monopoly.” XM and Sirius are the only two providers of subscription satellite radio services, so any merger should yield a single monopoly producer of that particular kind of service.

The central issue is the definition of the market. If the market is defined narrowly—satellite radio entertainment providers—then monopoly is exactly what will result. However, in a more broadly defined market, a combined XM–Sirius would not be a monopoly. For example, we could delineate the market to be all suppliers of audio content broadcast into cars (which would include the other radio providers now referred to as “terrestrial radio”), or even the market for all audio music, news, and entertainment sources (which would include Internet radio and downloads from websites like iTunes). In these broader markets, even a single "monopoly" satellite radio firm would face a great deal of competition.

The debate over this proposed merger will center around its impacts on competition and consumer welfare. If the market is narrowly defined, the traditional complaints regarding monopolies are legitimate: reduction in consumer choice, sub-optimal production of content, damping of innovative activities, and, of course, higher prices. However, the firms argue that consumers will benefit from efficiencies resulting from combined operations—their press release claims annual cost savings of up to $7 billion per year and outlines other expected synergies. Of course, it should be noted that both companies have been operating for over 5 years, but neither has generated a profit yet despite growing revenues and significant efforts to expand their subscriber bases.

There are several significant obstacles to the completion of this merger. In 2001, satellite television providers DirecTV and the Dish Network proposed a merger that was eventually blocked by antitrust authorities. Many observers see the XM–Sirius merger as the audio equivalent of the DirecTV–Dish Network deal. A further complication exists because when the two companies were originally licensed, the FCC explicitly forbade one company from owning both satellite broadcasters. The proposed merger will require FCC and Justice Department approval and will likely attract the attention of Congress, so the companies must be hoping that regulators will take a fresh look at the market and competition.

Discussion Questions

1. Can you think of other instances in which a firm dominates a narrowly defined market, but faces competitors from a more broadly defined market?

2. The most famous recent antitrust case was the Microsoft case. In that case, Microsoft argued that even though it dominated the market for computer operating systems, it was still vulnerable to competition from other forms of software. This is a similar argument to the one being made by XM and Sirius. Looking back on the last few years, how much merit did Microsoft's argument have? Does the rise of firms like Google and YouTube mean Microsoft's market power has eroded?

3. Sirius and XM argue that there are economies of scale that make the provider of satellite entertainment a natural monopoly, like the local power company. On the other hand, price wars between the two services may be just as much to blame for their failure to make money. If you were a regulator, what guidelines for pricing could you establish to allow the combined company to realize the economies of scale without gouging consumers on price?

Harold Elder is a professor of economics at the University of Alabama. His research and teaching focuses on applied microeconomics, including law and economics, public sector economics, and a range of public policy topics. He regularly teaches Principles of Microeconomics in the College of Commerce and Business Administration and is the advisor for his university's master's and Ph.D. programs.